NEW YORK--(EON: Enhanced Online News)--The timing of stock-related chief executive officer (CEO) compensation
is a predictor of corporate actions that boost short-term stock price
but destroy long-term value, according to the two winning academic
papers of the Investor
Responsibility Research Center Institute (IRRCi) annual investor
research competition. The winning academic research teams will share a
$10,000 award.

“These are the first papers to
closely examine the structure of CEO equity vesting schedules and then
correlate it to value-creating or value-destroying corporate activities.”

“The two winning research papers use the vesting schedule for CEO
compensation – when the CEO can sell stocks and options – to demonstrate
that heavy vesting periods lead to actions that suggest that some CEOs
are more concerned with short-term stock price movement than long-term
value creation.” said Jon
Lukomnik, IRRCi Executive Director. “These are the first papers to
closely examine the structure of CEO equity vesting schedules and then
correlate it to value-creating or value-destroying corporate activities.”

“For example, the research finds that a high amount of equity vesting
will increase the likelihood that a company will revise guidance upward;
reduce research and development and capital expenditures; buy-back
shares or increase the amount of its share buy-back; and even enter into
merger and acquisition activity. The research paints a clear and bold
portrait of short-termism with concern for long-term value creation
faded into the background,’ Lukomnik explained.

The first winning research paper, Equity Vesting and Investment,
is co-authored by Alex
Edmans, London Business School; Vivian
W. Fang, Carlson School of Management at the University of
Minnesota; and Katharina
A. Lewellen, Tuck School of Business at Dartmouth. This paper
studies the link between real investment decisions and CEO’s short-term
stock price concerns. It finds that vesting equity induces CEOs to
reduce investments in long-term projects and to take actions that
increase short-term stock price. More broadly, it shows that the
structure of CEO compensation has a causal effect on real-world
decisions. Download the research here.

The second winning paper, The Long-Term Consequences of Short-Term
Incentives, is also co-authored by Edmans
and Fang,
together with Allen
H. Huang of the Hong Kong University of Science and Technology. This
paper studies two corporate actions that allow accurate measurement of
the long-term consequences of short-term incentives – stock repurchases
and mergers and acquisitions (M&A). The research shows that the
impending vesting of equity may lead CEOs to take myopic actions that
boost the short-term stock price at the expense of long-term value. An
increase in vesting equity is associated with a greater frequency of
stock repurchases and M&A announcements, and both corporate events were
associated with higher short-term returns and lower long-term returns.
Download the research here.

Alex Edmans said, “We are honored to win this award. With IRRC's leading
role in the practice of corporate governance, we hope our research can
be used to guide the reform of executive pay. While pay does need to be
improved, a correct diagnosis must precede treatment. Many views on
executive pay – and thus calls for reform - are based on hand-picked
anecdotes rather than large-scale evidence. While reformers often target
the level of pay, our research suggests that the horizon of pay is a
more important dimension. Giving CEOs equity with long vesting periods
will encourage them to focus on long-term investment rather than
short-term earnings.”

Vivian Fang said, “For decades, both academics and practitioners have
argued that short-term incentives hinder long-term growth. While
intuitive, showing a causal effect of incentives on CEO actions is
challenging because the same factors that drive CEO actions can also
drive incentives. We use CEO vesting schedules - which were decided
several years prior and thus are unlikely linked to current CEO actions
- as a measure of short-term incentives. By linking vesting equity to
firm outcomes that reflect value erosion, we show a negative causal
effect of short-term incentives on firm value.”

The academic paper submissions were of such high quality that the judges
selected another research paper for Honorable Mention recognition, Corporate
Governance and The Rise of Integrating Corporate Social Responsibility
Criteria in Executive Compensation: Effectiveness and Implications for
Firm Outcomes. This research is co-authored by Caroline
Flammer at Boston University’s Questrom School of Business; Bryan
Hong at the University of Western Ontario’s Ivey Business School;
and Dylan
Minor at Northwestern University’s Kellogg School of Management.
This study also examines the structure of CEO compensation, and it finds
that the integration of corporate social responsibility criteria in
executive compensation – a relatively recent phenomenon – leads to an
increase in long-term orientation; an increase in firm value; an
increase in social and environmental performance; a reduction in
emissions; and an increase in green innovations. Download the research here.

James Hawley, Professor emeritus and Director of the Elfenworks Center
for Fiduciary Capitalism at St. Mary’s College of California

Erika Karp, Founder, CEO and Chair of the Board of Cornerstone Capital

Nell Minow, Governance Expert and Huffington Post Columnist

The judges did not award a prize for a practitioner paper this year.
Biographies of the judges are available here.
Information on past winners is available here.
More information about the award is available here.
Read the full body of IRRCi research here.

The IRRC Institute is a nonprofit research organization that
funds academic and practitioner research that enables investors,
policymakers and other stakeholders to make data-driven decisions. IRRCi
research covers a wide range of topics of interest to investors, is
objective, unbiased and disseminated widely. More information is
available at www.irrcinstitute.org.
Follow IRRCi on Twitter at @IRRCResearch.